Inflation in Europe: A Rollercoaster That is Only Moving Up

European consumer prices are rising at their fastest pace since 1997, resulting in the highest inflation rates the region has seen in thirty years. The 19 countries that use the euro, the eurozone, saw inflation hit 4.9% in November. The last time the eurozone had inflation pass the 4% mark was right after the Great Recession, in July 2008. This greatly exceeds the 2.2% inflation expectations of The European Central Bank (ECB), which manages the euro and monetary policy in the region.

A leading factor in Europe’s rising prices is the increase in energy prices, which rose 27.4% in November. In comparison, energy prices rose 23.7% in October and 17.6% in September, according to Eurostat. It is believed that half of the recent increase in inflation is due to higher energy prices. 

Other reasons for the high levels of inflation are the COVID-19 pandemic and the subsequent reopening of the economy. Inflation has been increasing with the reduction of coronavirus restrictions. Demand, which has been accumulating during lockdowns, is on the rise, resulting in shortages of valuable items such as shipping containers. Even further, last year had especially low inflation, creating higher levels this year, since inflation is measured by comparing prices from year to year. This phenomenon, called the ‘base effect’, is expected to phase out with time.

This situation encompasses some of Europe’s most powerful actors. Germany, which has the largest economy in Europe, saw a 5.2% increase in consumer prices in November and the highest inflation it’s experienced since 1993. The country is known for being historically afraid of inflation, especially following the hyperinflation it experienced in the post-WWI era. Other major economies are following its lead, with France’s inflation rate hitting 3.4% in November.

There has been debate over the ECB’s role in the current situation. While the ECB remains confident that the high rise in prices is a temporary trend, many argue that greater monetary policy is necessary. Some believe that the ECB is reluctant to intervene due to its mistakes in the past. The organization lifted rates too quickly before the 2008 global financial crisis and the 2011 sovereign debt crisis, causing it to adopt a loose monetary policy shortly after.

"The key question is to know whether this is a transitory inflation or not,” said French Finance Minister Bruno Le Maire to reporters last week. “Nobody has a response to that key question."

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